Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2009-10-13
Number: 09-089/1
Author-Name: Maarten Janssen
Author-Workplace-Name: University of Vienna,and Erasmus University Rotterdam
Author-Name: Alexei Parakhonyak
Author-Workplace-Name: Erasmus University Rotterdam
Title: Minimum Price Guarantees In a Consumer Search Model
Abstract: This paper is the first to examine the effect of minimum price guaranteesin a sequential search model. Minimum price guarantees are notadvertised and only known to consumers when they come to the shop.We show that in such an environment, minimum price guarantees increasethe value of buying the good and therefore increase consumers’ reservationprices. This increase is so large that even after accounting for thefact that some consumers will buy at lower prices, firms profits are largerunder minimum price guarantees than without it. We also show that anequilibrium where all firms offer minimum price guarantees does not existbecause of a free-riding problem. Minimum price guarantees can onlybe an equilibrium phenomenon in an equilibrium where firms randomizetheir decision to offer these guarantees.
Classification-JEL: D40; D83; L13
Keywords: Sequential Search, Minimum Price Guarantees,Welfare Analysis
File-Url: https://papers.tinbergen.nl/09089.pdf
File-Format: application/pdf
File-Size: 243771 bytes
Handle: RePEc:tin:wpaper:20090089